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A Challenging Global Climate for Fragrances

By: Rob Walker, Euromonitor International
Posted: October 26, 2012, from the November 2012 issue of GCI Magazine.

Globally, retail sales of fragrances reached nearly $44 billion in 2011, of which premium brands accounted for 54%. Premium fragrances are heavily exposed to weaker consumer confidence in developed markets, however. And with softer spending patterns in BRIC, there is a risk that demand could get squeezed on two fronts. Mass brands have more resilience in the current operating environment, which could open new windows of opportunity as consumers trade down. Increasingly, premium brands will need to justify their price points and find innovative ways to stimulate demand.

Tougher Times Ahead for Premium Fragrances

It is, perhaps, a measure of the changing landscape for fragrances that Chanel No 5, the top-selling premium fragrance in the world, has unveiled Hollywood actor Brad Pitt as the face to front its new advertising campaign. It will be the first time the iconic French brand has used a man, and a 48-year-old man at that, in its lead marketing.

At first sight, there seemed little need of any radical shake up in the brand’s marketing strategy. In 2011 retail sales of Chanel No 5 increased 6%, at fixed U.S. dollar prices, according to data from Euromonitor International. That was the brand’s best performance in a decade, thanks to bullishness in North America and Western Europe, and strong new demand in China.

Indeed, demand for Chanel No. 5, and premium fragrances as a whole, has shown remarkable insulation from the economic storms buffeting most consumer goods markets. The top five markets in the world for premium brands (by retail value) were all in recession-hit Western markets last year, namely the U.S., France, Germany, the U.K. and Italy. And each of those generated year-on-year growth 2009–2011, according to Euromonitor International.

There are new signs that the insulation of premium fragrances could start to break down, however. Premium brand owners need only look at the latest financial results in the luxury goods industry (for example, at Tiffany & Co and Burberry) to see that consumers in Western markets are cutting back on high-end purchases, while spending patterns in the BRICs are getting softer.

In 2011, the U.S. and the U.K. generated almost $600 million of absolute retail value growth in premium fragrances, which was 42% of global growth. Were consumers in those markets to start drifting away from premium fragrances (and trends in luxury goods are a harbinger, in this regard), the strategic implications would be far reaching for L’Oréal, LVMH, Procter & Gamble, Coty, Estée Lauder and Chanel—the six biggest players in premium fragrances by retail value.

For example, in the specific cases of Chanel No 5 and LVMH’s J’adore, the U.S. and Western Europe accounted for more than 70% of retail sales in 2011, according to data from Euromonitor International.

The problem for these brands is that changes in premium discretionary spending patterns are beginning to manifest. Most poignantly, the treat-yourself and pampering culture that played out so well for premium beauty and personal care in Western Europe and the U.S., especially in 2010 and 2011, is starting to run its course.

This is because economic confidence has taken a turn for the worse. There is a prevailing sense that consumers believe their spending power will continue to weaken into the long term. It is not simply a blip to be weathered. As such, it is much harder to justify retail indulgences.

The Growing Importance of the Middle-aged Dollar

With a decrease in discretionary spending, a potentially risky new marketing campaign behind Chanel No 5 starts to make more sense. Irrespective of how the campaign develops, the endorsement by a middle-aged actor also brings into focus key demographic factors that will increasingly impact on mass and premium fragrances alike.

First, the world’s population is aging, despite youthful demographics in much of Latin America, the Middle East and Africa. The mean age of populations in France, Italy and Germany is now 40 or over, for example. By 2020, key consumption bases such as China and the U.K. will have a mean age of over 40 as well.